Stock Option Trading Strategy – Bear call spreads on retail and restaurant stocks.

July 10, 2007
Author: Peter Stolcers, Founder of OneOption

The market is trading lower ahead of major earnings announcements next week. I suspected this might happen. In yesterday's report, I mentioned that there was some short squeezing going on during last week's light holiday trading. I specifically cited the retail group. These companies have been lowering guidance for the last few months. One of our picks in the Daily Report is down $14 today. This morning, SHLD lowered earnings guidance and said they will miss expectations. The major economic release this week is retail sales and I believe that barring a few exceptions, the whole sector will be relatively weak. This will push the market lower and set us up for a potential earnings/expiration rally. I feel that consumers are tapped out. High debt levels and rising interest rates are putting the squeeze on a society that spends more than it earns. As a nation, we now have 26 consecutive months with a negative savings rate. Compare that to China where people have much less, yet they manage to save 50% of what they make. I'm not going to cast gloom and doom on you today. I will simply caution you to avoid any consumer stocks that rely on domestic consumption. Better yet, short them. That includes durable goods like washing machines, cars, swimming pools, electronics... For now, look for bullish opportunities in multinational companies that supply goods or services to these areas; energy, mining, construction, infrastructure. Global growth will fuel earnings for these companies. Right now, the U.S. is the weakest link in the chain. I can't ever recall saying that. As long as the unemployment rate stays below 5%, Pandora's Box will remain closed. If that changes, the high debt levels could throw us into a severe recession as consumers have to restrict their buying. I don't see that unfolding this year, but next year scares me.image

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